Avoid making this common mistake with your health savings account

Health Savings Accounts (HSAs) can be sneaky-good retirement savings vehicles, but only a mere 9% of account holders actually invest their funds, according to research from the Employee Benefit Research Institute (EBRI). And yet by doing so, you can rapidly grow the funds in your account, with the added bonus of being able to spend that money penalty-free on anything after the age of 65, not just health care expenses.

The case for investing through HSA accounts

Most people think of HSAs as a better version of a Flexible Savings Account (FSA). They’re similar in that they’re both designed to help you pay for health care costs without any tax penalties, and all of your contributions to the account are tax-deductible (or made pre-tax, if your account is run by an employer).

However, the difference with HSAs is that the funds carry over every year — without the “use it or lose it” restrictions you get with FSAs. Even better than that, however — and seemingly less known — HSAs let you invest the money in your account (either through mutual funds stocks, ETFs, or bonds), which allows you to take advantage of compound interest and grow those funds over time.

EBRI research reveals that when HSAs include investments in their accounts, those investments represent 74% of their total HSA balance. And a recent report by the research firm Devenir corroborates these findings, as they found the average HSA balance as of June 30 was $17,954 for accounts with both cash deposits and investments — 6.6 times the average balance for accounts without investments.

Okay, so why don’t more people invest with HSAs?

According to Pensions & Investments, many account holders don’t have enough money in their HSA to begin investing, as many don’t meet the minimum of threshold of at least $1,000 - $2,000 in their accounts (the amount varies, depending on the provider).

Awareness seems to be a factor, too. As an EBRI statement puts it, “By fostering employee engagement with HSAs and providing a contribution to their employees accounts, employers can help nudge their employees toward more optimal usage of HSAs.” In other words, plan sponsors and administrators need to let their employees know that investing through their HSA is possible in the first place.

This article was written by Mike Winters from Lifehacker and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.